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Chicago "junking" Triggers $2.2 Billion Payment, Deepening Financial Crisis

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In early March, we discussed the rather deplorable state of Illinois’ public pension plans which, we noted, are underfunded by some 60%. On a statewide basis, making up the deficit would cost around $22,000 per household, which gives you an idea of the cost to taxpayers of the grossly underfunded pension liabilities.


A month later, we pointed out the fact that spreads between Chicago’s muni bonds and USTs had blown out to the tune of 60bps as mayor Rahm Emanuel's re-election became more assured. We also highlighted a WSJ graphic showing that when it comes to unfunded public worker pension liabilities per person, nobody does it like Chicago.


The situation worsened materially last Friday when the Illinois Supreme Court struck down a pension reform law that aimed at closing the state’s $105 billion hole.

Via The Chicago Tribune:

The Illinois Supreme Court on Friday unanimously ruled unconstitutional a landmark state pension law that aimed to scale back government worker benefits to erase a massive $105 billion retirement system debt, sending lawmakers and the new governor back to the negotiating table to try to solve the pressing financial issue.

The ruling also reverberated at City Hall, imperiling a similar law Mayor Rahm Emanuel pushed through to shore up two of the four city worker retirement funds and making it more difficult for him to find fixes for police, fire and teacher pension funds that are short billions of dollars.

That ruling, it turns out, would be the death knell for Chicago’s credit rating, at least as far as Moody’s is concerned. Citing “expected growth in the city’s highly elevated unfunded pension liabilities,” the rating agency cut the city to junk at Ba1. This is bad news for Chicago for a number of reasons, not the least of which is the fact that Emanuel was looking to refi nearly a billion dollars in floating rate debt into fixed rate notes and borrow another $200 million to pay off the related swaps — clearly this will now be far more difficult. The ratings agency’s actions also given creditors accelerated payment rights, meaning the city could be on the hook for some $2.2 billion in principal and interest on its outstanding liabilities.

An outstanding plan pay off debt with debt, I wonder if Chicago have any SDR's they can call upon?

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Maybe too white to fail.

Detroit was allowed to fail.

Chicago today is only about 30% non-hispanic white. The metro area is probably still 70-80% white, but they live in the suburbs outside of the city tax authorities. Same as Detroit. The metro area of Detroit (all 5.5 million of it) is still majority white - many of them will be the ones hurt, having left the Detroit city area for the suburbs a while back.

Regardless of the demographics today, i'd hazard a guess that most of the pension commitments were build up from an era when most of the city govts employee's were white (IIRC Detroits police force was still 95% white in the 80s when the city was already black majority - presumably it will be their pensions hitting reality too) - that goes for Detroit and Chicago.

If anything, it would benefit the remaining black residents of Detroit for detroit to fail, instead of paying the mostly white pensioners.

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If anything, it would benefit the remaining black residents of Detroit for detroit to fail, instead of paying the mostly white pensioners.

Particularly as, if those pensioners have any sense, they'll be leaving the city as soon as they start collecting their pension.

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In downgrading the city, Moody’s said it expected “Chicago's credit challenges will continue, both in the near term and in the long term [as] unfunded liabilities of the Municipal, Laborer, Police, and Fire pension plans grow and exert increasing pressure on the city's operating budget.” That looks to have been an accurate assessment, because as Bloomberg reports, Chicago’s budget gap is set to triple by 2017.

Chicago's budget gap is expected to triple with statutory contributions to pension funds, after the city improved its fund deficit for four straight years to less than $300 million in fiscal year 2015.

"Notwithstanding the gains achieved by the city in recent years in addressing its structural budget deficit, the budget gap in coming years is likely to widen from the 2015 level due largely to growing salaries and wages and funding requirements from city pension plans," Chicago bond documents, released yesterday, said.
A budget gap of $430.2 million was projected for 2016 and $587.7 million for 2017. However, "statutory obligations to the [police pension fund] and [firemen's pension fund] will, in the absence of legislation modifying the city's contributions to these funds, increase the projected budget gaps for 2016 and 2017 by more than $500 million," the documents said.


Still it could be worse....

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